Purpose of Term Loans


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Purpose of Term Loans:
The borrowers seek term loans for many purposes depending upon the requirements, need and the necessity of the borrowers. Some of the important purposes are:

1.      To install a new machinery or plant by arranging term loans in the hope that increased installed capacity will enable the concern to repay the loans quickly.
2.      To purchase a permanent asset or to make certain additions to the existing property or asset.
3.      To take the advantage of rapid industrialization and install machinery equipped with modern techniques to start production of a new product or for modernization of plant and machinery.
4.      To refinance the funded debts or to pay off bonds or debentures bearing a high rate of interest. It will reduce the burden of interest on profits of the company.
5.      A term loan can also help in rearranging maturities, elimination of restrictive provisions of bond issues, in redeeming the redeemable preference shares, etc.

The ‘Term’ of a ‘Term Loan’:
The period for which a term loan is granted primarily depends upon the life of the assets to be acquired with the help of that term loan. Obviously, the term will not be longer than the life / residual life of the assets covered. Term loan is expected to be repaid not by liquidating the assets but from increased earnings.
The term also depends upon the repaying capacity of the borrower. This aspect gets higher weightage in case of sanctioning of the loans. The additional facet of ‘social obligation’ is also given due consideration in some cases like loans for projects in specified backward areas, loans for priority sector etc.


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